Lower Provisions for Loan Losses Are Boosting Earnings for S&P 500 Banks for Q1

The Financials sector was a focus sector for the market this past week, as 15 of the 22 companies in the S&P 500 that reported actuals earnings for Q1 during the week were in this sector. Most of these companies were in the Banks industry, including JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup. This industry has the largest year-over-year earnings growth rate of all five industries in the sector at 248%. It is the largest contributor to earnings growth for the sector. If this industry were excluded, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for the Financials sector would fall to 58.8% from 118.8%. However, it should be noted that the (blended) revenue growth rate for the Banks industry for Q1 is only 3%. How is it possible for an industry to report earnings growth of almost 250% and revenue growth of only 3%?

One reason is that companies in the Banks industry are reporting (or are expected to report) significantly lower provisions for loan losses in Q1 2021 relative to Q1 2020. These provisions for loan losses have no impact on top-line growth, but can have a substantial impact on bottom-line growth. Banks dramatically increased their provisions for loan losses in the first half of 2020 in conjunction with the economic lockdowns caused by COVID-19. With restrictions easing and economic conditions improving, banks are now drastically reducing these provisions.  

FactSet Estimates actively tracks this metric for all 18 companies in the Banks industry in the S&P 500. All 18 of these companies have reported or are projected to report a year-over-year decline in provisions for loan losses for Q1 2021 relative to Q1 2020. The average (year-over-year) decline for these 18 companies is -109%. The (blended) year-over-year decline in provisions for loan losses for the Banks industry is -$40.7 billion (-$10.2 billion vs. $30.5 billion). At the company level, JP Morgan Chase (-$12.0 billion), Citigroup (-$9.1 billion), Bank of America (-$6.6 billion), and Wells Fargo (-$5.1 billion) have reported the largest year-over-year declines in provisions for loan losses.

Based on current estimates, the Banks industry will likely see another significant boost to earnings in Q2 2021 due to lower provisions for loan losses. In Q2 2021, the Banks industry is projected to report earnings growth 295%, but a decline in revenue of -6%. However, analysts predict provisions for loan losses will start to increase year-over-year in Q4 2021. Both the Banks industry (-5%) and the Financials sector (-6%) overall are expected to report year-over-year declines in earnings in Q4 2021.

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